The first thing you should ask yourself before searching for the best CD rates is how long you’re okay being without that amount of money. Maybe you’re looking for a way to boost your vacation fund over the next six months. Or perhaps your child is four years shy of college, and you want to maximize savings. Once you determine your time frame (or how long you’d like to invest), the process becomes pretty simple: compare rates and secure the best APY available.
What Is a CD?
A certificate of deposit (CD) is a savings deposit, usually for a fixed period, that entitles the bearer to receive interest. CDs are offered at just about any bank where you would open a savings account. The fixed time periods, called terms, may be as short as a month or as long as five years or more. CDs generally offer higher interest rates than regular savings accounts, with better rates the longer you lock up your money. In most cases, you’ll face a penalty fee if you take your money out of the CD before the term expires.
How to Find the Best CD Rates
Step 1: Comparison Shop
Traditional banks or credit unions will offer a range of deposit accounts, but before you embark on a tour of nearby lending institutions, consider comparison shopping online to land the best deal. As with savings accounts, online banks often offer the best CD rates because they don’t have as much overhead as traditional competitors — this cost savings is passed on to you in the form of better rates.
Step 2: Invest for a Longer Term (Maybe)
Long-term CDs do have higher interest rates, but the trade-off is that you don’t have access to your money for a longer period of time. If you need a more fluid solution, consider CD laddering. With this technique, which I cover later in this article, you can benefit from the best CD rates available without tying up all your money.
Step 3: Look for Special Deals
Banks occasionally offer a low rate for special circumstances such as appearing attractive (and competitive) in a crowded marketplace. If you do decide to go to your local bank or federal credit union, it never hurts to ask in person whether your bank can do a little bit better. Online CDs often provide higher rates, so savers should check there too.
Step 4: Look Beyond Traditional CDs
Today’s interest rates are low. Many experts, including Mike Schenk, chief economist for the Credit Union National Association, say that rates are bound to slowly rise. Liquid and bump-up CDs (more on these down below) are both great options for time periods of rising rates, but the trade-off may be slightly lower initial rates. These types of CDs are inherently more risky, so if low risk is what drew you to CDs in the first place, they might not appeal to you.
Types of CDs
CDs are a fairly simple product, but banks offer several variations that can benefit you if you do your homework. Here are the main types:
- Traditional: These CDs lock away your money for a certain amount of time, ranging from six-month to 5-year CDs. The longer the term, the better your interest rate, which is fixed. Educate yourself on the terms, conditions, and early withdrawal penalties. These can vary from bank to bank, but a withdrawal fee equal to six months’ interest is most common on a 12-month CD.
- Variable rate: The interest rates on these CDs can change periodically according to certain indexes, and the setup varies from bank to bank. You’re still guaranteed your initial investment but are vulnerable to fluctuating interest rates. These can be a better bet when you’re reasonably sure that rates will go up.
- Bump-up: Say you put your money in a CD with a certain term and interest rate, but then the bank offers another CD with a similar term but a better interest rate. You can “bump up” your CD to the new interest rate. However, you can typically only do this once, and your original rate may be a bit lower than those offered on traditional CDs.
- Liquid (or ‘no penalty’): If you need to withdraw your money before your term is up, liquid CDs will let you do that without paying a penalty fee. But, you’ll pay for this convenience with a lower interest rate.
- Callable: You’ll get a higher interest rate with callable CDs, but the bank reserves the right to “call back” your money and nix your CD before your term is up. So, if you have a 3-year CD and the bank calls it back after two, you lose out on a year of interest.
- Zero-coupon: You can purchase these CDs for much less than face value. For instance, you can get a $50,000 CD for $30,000, but you won’t see any interest until the CD is mature. And you still have to pay taxes on that anticipated interest every year.
- Jumbo: True to its name, a jumbo CD is an option only if you have lots of cash on hand — typically $100,000 or more. Your jumbo investment will typically net you a higher interest rate.
- Brokered: A brokered CD is simply a CD purchased on your behalf by a financial adviser or broker who does the legwork of finding the best rate. Of course, you’ll probably pay a fee for this service.
CD Terminology Primer
Interest rates for CDs are denoted as APY, which stands for “annual percentage yield.” (Don’t confuse APY for APR, which means “annual percentage rate” and relates to loans and credit cards.)
If you put $500 in a one-year CD with a 1.10% APY, you would make $5.50 in interest after the year-long term. (Note that interest rates are always denoted annually, which can be confusing if you’re considering a CD with a shorter term.) But if you deposit $500 in a six-month CD with a 1.10% APY, then you aren’t going to see $5.50 in interest after the six-month term. Instead, you’ll see $2.70 — half the interest you would have earned in a year.
Another thing you’ll probably see denoted: How often your CD compounds — when the interest rate is applied to the balance of your investment. This may happen as little as every year or as often as daily (or even continuously). Fortunately, if you directly compare the APY from current bank CD rates, you don’t have to worry about how frequently the CD compounds. The APY will already take that into account no matter how frequently it occurs.
Strategies to Help You Maximize Your Return: CD Laddering, Barbells, and Bullets
If you’ve poked around the world of CDs a bit, you may have heard of “CD laddering.” Simply put, this is the technique of diversifying your assets among several CDs with different maturity dates. While a regular CD ladder, sometimes called a straight CD ladder, is the most common strategy, there are other variations to consider.
This is an investment strategy in which you divide your total investment into several equal chunks of cash. You invest each chunk in a CD with a different term so that the CDs mature at different times.
For example, if you have $10,000 to invest, you might invest $2,500 in one of each of the following: a one-, two-, three-, four- and five-year CD. When your first CD matures in one year, you can access your cash, plus interest earned, without a penalty. Then you can reinvest it in a five-year CD with a better interest rate. You can do the same thing when the two-year CD matures, then the three-year CD, and so on. Eventually, you’ll have a five-year CD maturing every year. You’ll be enjoying the higher APY of a longer-term CD, but you’ll still be able to access some of your money every year.
A major benefit of this strategy over investing all your cash in one longer-term, higher-interest rate CD is that you can access a portion of your investment relatively soon, when the first CD matures. Then, you can reinvest the money into a longer-term CD at a better interest rate and continue doing the same thing each time one of your CDs matures. Essentially, you get the benefits of better interest rates with the assurance that you can access some of your money periodically.
The downsides to CD laddering mirror those of investing in CDs in general. Even though you’ll have more access to your money, you still won’t have the liquidity that a savings account would offer. And portions of your money may be locked in at a low APY even as rates rise. Fortunately, being able to reinvest periodically can help offset the latter risk.
Barbells are for investors who want to maximize their return in the short and long term, but are okay skipping returns in between. Using this strategy, you divide your money into very short-term CDs, such as three or six months, and much longer-term CDs, such as five years. For example, if you put $2,000 in a six-month CD and $2,000 in a five-year CD, you’re betting current CD interest rates will rise long term, but you still have access to some of your cash. When the six-month CD matures, you can then hold onto the cash, reinvest in more short-term CDs, or consider slightly longer terms or ladders, depending on the interest rate climate.
If you have a defined savings goal — or you’re a savvy investor who is predicting a healthy rise in interest rates that will peak at a certain time — consider setting up a CD bullet. For this strategy, you can put your money in CDs with several different terms, but your goal is to have them mature at the same time.
For instance, if I knew I wanted to put some money away for a 10-year anniversary trip in 2024, I could put some of my money in a five-year CD right now. In two more years, I might invest in a couple of three-year CDs. In four years, I might invest in a few one-year CDs. All of them will mature right as I start to plan my trip. I don’t lose access to all those funds until the last year. And if I’m an investor who’s timed things right, I’ll have reaped a nice reward because of rising bank CD rates.
Is a CD Right for You?
CDs are a stable, low-risk way to dip your toes into the world of investing. They’re easy to open and generally don’t require further decision-making once your money is secure. Traditional CDs guarantee you’ll get your investment back — plus interest earned with a predetermined interest rate — when your term is up.
If you can keep your hands off your money for the whole term, you’ll reap a higher interest rate than what’s offered by a typical savings account. CDs are worth a look for someone who is wary of higher-risk investments and can afford to sock money away for a longer period of time.
On the other hand, if you need easy access to your savings, a CD isn’t the best choice. For instance, you don’t want to put your emergency fund in a CD — that’s money you need to be able to withdraw immediately if necessary. Also, the one year CD rate might not earn you much more than a savings account unless you set aside a lot of money for a longer term. Finally, consider that interest rates can only go up from today’s levels, and you might not be pleased that your money is locked away at today’s rates if they finally do rise.
If you’d rather have your funds in a spot that’s easier to tap, check out The Simple Dollar’s guides for the Best Money Market Accounts and Best Savings Accounts. Both options will help you retain the liquidity you want at competitive rates.
Why Are CD Interest Rates so Low?
While the best CD rates have improved in the past two years and now approach 2.6% APY at online banks, today’s current CD rates are nothing to write home about in the grand scheme of things. The national average APY on a one-year CD nationwide was 0.88% in May 2019, according to Bankrate; in 2019, one-year CDs averaged a 2.5% yield.
The Federal Reserve lowered the rate in September by a quarter point, and CD APYs have come down accordingly.
Which Banks Offer the Highest CD Rates?
If you’re looking to open up a CD account, you’ll typically earn a higher return online — here are some banks to consider. Ally Bank, for example, offers CD accounts with a 2.30% APY, though you’ll have to commit your savings to the CD account for five years. Goldman Sachs offers 2.50% APY for six years, and Discover Bank offers 2.40% APY for five years. But if those terms feel too long, several financial institutions offer a one-year CD at 2.30% APY. Here’s a helpful table to compare rates (as of September 2019):
|Synchrony Bank||2.30%||5 years||$2,000|
|Ally Bank||2.00%||1 year||$0|
|Capital One||1.60%||5 years||$0|
|Capital One||1.65%||3 years||$0|
|Capital One||2.10%||1 year||$0|
|Discover Bank||2.40%||5 years||$0|
|Marcus by Goldman Sachs||2.50%||6 years||$500|
|Marcus by Goldman Sachs||2.25%||1 year||$500|
The Bottom Line
After you weigh the pros and cons of CDs, if you decide that they’re a good place to stash your cash, then it’s time to shop around for the highest rates. Begin by comparing current CD rates using our online quote tool. Remember to double-check minimum deposit amounts and term lengths so that you know you how much cash you have to lock away and for how long.